The Euro gave back the overnight advance to 1.4274 and the single-currency may continue to lose ground in the North American trade as policy makers struggle to contain the sovereign debt crisis. In response to the credit rating downgrade for Cyprus, a spokeswoman for the EU said that the group is not looking to bailout the country 'at any level,' and went onto say that the economy is fundamentally healthy. However, the slowing recovery in Europe certainly heightens the risk for contagion, and the central bank looks as though it keep the benchmark interest rate at 1.50% throughout the remainder of the year as the fundamental outlook remains clouded with high uncertainty.

The European Central Bank's monthly report mostly reiterated the comments we heard from President Jean-Claude Trichet, with the statement highlighting a greater downside risk for growth, while survey participants see economic activity expanding 1.6% in the following year amid an initial forecasts for a 1.7% rise in GDP. At the same time, the ECB also announced that it will continue to participant in the bond market to purchase Italian and Spanish debt, and the Governing Council may carry its nonstandard measures into the following year as policy makers struggle to restore investor confidence. In turn, the recent downturn in the EUR/USD could threaten the rebound from 1.3836, and the near-term outlook for the pair remains fairly bearish as it continues to trade weigh the descending triangle.

The British Pound pared the overnight advance to 1.6206 and the GBP/USD may continue to retrace the advance from the previous month as market participants speculate the Bank of England to increase its asset purchase program beyond the GBP 200B target. In light of the recent comments from the BoE, the policy meeting minutes due up next week could reveal a growing shift within the MPC, and we may see board members Spencer Dale and Martin Weale scale back their votes for a 25bp rate hike as policy makers see an increased risk of undershooting the 2% target for inflation. As interest rate expectations deteriorate, the sterling is likely to face additional headwinds over the near-term, but the pound-dollar may consolidate ahead of the BoE minutes as market participants weigh the outlook for future policy.

The U.S. dollar appears to be regaining its footing and the greenback may continue to recoup the losses from the overnight trade as risk aversion seems to be flowing back into the currency market. As equity futures foreshadow a lower open for the U.S. market, the reserve currency may strengthen on the back of safe-haven flows, and risk sentiment is likely to drive price action throughout the remainder of the day as the economic docket remains fairly light for Thursday.